Derivatives (Derivatives).

When trading on the stock exchange, there are many options for protecting yourself from price risks, one of the most common options for fixing prices is a derivative instrument.

Derivatives are contracts that fix the price of one or more specific commodities during exchange trades. Their use allows for fixing the price of an asset at a specific level and avoiding losses due to price fluctuations.

Derivatives are used in trading assets such as currencies, bonds, stocks, market indices, interest rates and commodities.

Main types of derivatives.

Futures are an obligation to enter into a transaction on a specific group of commodities with a specified date and price.

Forward contracts are agreements to deliver and pay for a specified quantity of a commodity with a fixed price and transaction time.

Options , unlike the previous two options, are the right to enter into a transaction with a specific asset with a fixed term or maturity date.

Swaps are an obligation that provides for the exchange of payments according to the terms specified in the contract and are used in both exchange transactions and banking.

Derivatives are typically used to reduce price risk, choosing the most appropriate instrument depending on the situation.

An example of such a transaction is hedging in a securities transaction.

A foreign investor, by purchasing shares of a US company for US dollars, is attempting to protect themselves from currency risk and simultaneously entering into a contract to purchase euros at a strictly fixed rate.

Now, when selling the shares back, they are protected from financial losses even if the euro appreciates.

This example clearly demonstrates how these types of derivatives are used to reduce currency risk.

Similar contracts can be used in energy or other commodity transactions. They allow a company to determine its potential profit in advance and protect itself from potential price fluctuations, exchange rates, or forex risks .